Court Denies En Banc Review in "Pay for Delay" Generic Drug Case

When patent infringement cases are settled, it's usually not the alleged infringer who gets paid nearly $400 million.

And when the payments were made to keep a cheaper version of Cipro, one of the world's most popular antibiotics, off the market until the patent expires, some patients' rights groups and government agencies cried foul. Those consumer advocates were dealt a blow in September, when a 2nd Circuit panel decided in Arkansas Carpenters Health and Welfare Fund v. Bayer AG not to reconsider en banc an April ruling that such "pay-to-delay" payments are perfectly legal.

This creates a split in the circuits, and the likelihood of Supreme Court review, says DePaul University Law School Associate Professor Joshua Sarnoff. The 6th and 11th circuits in 2003 had different rulings on similar cases; the 6th found them per se illegal and the 11th went with a rule of reason standard, Sarnoff says.

"It seems certain to me that the issue won't go away," he says. "There's likely to be a cert petition in the Cipro case itself."

At issue is the antibiotic ciprofloxacin hydrochloride, marketed by German pharmaceutical company Bayer AG in the U.S. as Cipro. A blockbuster in the prescription drug market, the drug has been prescribed to more than 340 million people worldwide, according to Bayer.

Bayer patented the drug in 1987, a patent that was due to expire in 2003, court documents state.

In October 1991, pharmaceutical company Barr Laboratories filed a challenge to Bayer's patent under the Hatch-Waxman Act of 1984. Bayer then sued Barr, which makes less-expensive generic versions of brand-name drugs, for patent infringement in the Southern District of New York.

In January 1997, about two weeks before the trial was to have started, the case was settled, with Bayer, the alleged victim, agreeing to give Barr, the alleged infringer, payments totaling $398.1 million. In return, Barr agreed not to market generic Cipro before Bayer's patent expired.

This is technically called a "reverse exclusionary payment" settlement, but more often referred to as a "pay-for-delay" settlement.

Rehearing Invitation

In the April ruling that upheld the $400 million payment to Barr, the 2nd Circuit relied on the precedent it set with its 2006 decision In re Tamoxifen Citrate Antitrust Litigation. That decision found that pay-for-delay settlements were legal unless they were "shown to have been procured by fraud, or a suit for its enforcement is objectively baseless."

However, the panel invited the plaintiffs to petition for rehearing en banc, saying the "exceptional important" nature of the antitrust implications called for it. Similarly, Judge Rosemary Pooler's dissent suggested the next step for plaintiffs, saying it "will be up to the Supreme Court or Congress to resolve the conflict among the Courts of Appeals."

Edelman says this language shows the law is not cut and dried in this area.

"It reflects an uncertainty within the law still and this is something that is likely to be presented to the Supreme Court," Edelman says.

Jones Day Partner Lawrence Rosenberg, one of the attorneys who argued the case for Bayer, declined to comment. Plaintiffs' attorneys Bruce Gerstein of Garwin Gerstein & Fisher and Steve Shadowen of Hangley Aronchick Segal & Pudlin did not return calls.

Bayer representatives said the company was pleased with the decision not to rehear the case, adding the company "will continue to vigorously defend itself" in a pending appeal of a Superior Court of California ruling last year that the reverse settlements didn't violate state law.

Political Implications

Congress passed the Hatch-Waxman Act as a compromise between giving drug-makers the exclusive right to sell the drug over the full 20-year patent and giving patients the opportunity to buy cheaper generic versions. The branded drug is granted five years of exclusivity. If a patent is successfully challenged, the generic drug company that challenged it gets 180 days as sole competitor. After that, all other companies can enter the generic market.

This is where it gets tricky, says University of Chicago Law School Professor Anup Malani. The Food and Drug Administration (FDA) has some say in determining what was the first challenge to the patent, he says. So if the FDA decides Barr is still the first challenge--even if Barr settled--any other company that challenges the patent won't get those 180 days as sole competitor, giving them far less incentive to take on the legal fees of challenging the patent.

Duke Law School Professor Arti K. Rai teaches on intellectual property law as it relates to biopharmaceutical research and development. She says the political situation has changed since Tamoxifen.

"The Bush administration's Department of Justice didn't have a clear position on these settlements," she says. "And it did not support the FTC when the FTC sought Supreme Court review in Tamoxifen."

In contrast, under President Obama, the DOJ filed amicus briefs for the plaintiffs both last year before the panel hearing and this year supporting the request for en banc review. And Rai believes Congress may try to change the law to address the pay-for-delay controversy. "Congress has been paying acute attention to this issue," she says.